07-08-2015 01-08-2016 27-07-2017 22-07-2018 Result Update BUY * Aug 08, 2018 Punjab National Bank Result Update Total assets down 4 QoQ; Advances down 4 QoQ Total assets came at 7378bn dragged by 4 drop in net advances at 4154bn. Gross advances dropped 4 QoQ to 4539bn. Within gross advances, domestic credit de-grew 2 QoQ to 4221bn on the back of 3/6/2 drop in large industry loan, MSME and retail loan. Within retail loan, housing and education loans showed traction recording 2/15 QoQ growth. Interest income grew at a robust pace on back of higher yields Interest income grew 15 QoQ to 131bn on the back of 147bps uptick in advance yield at 8.0 and 9bps uptick in investment yield at 7.4, resulting in 103bps improvement in total yield on funds from 5.7 in to 6.7. Noteworthy improvement in NIM NIM improved from 1.9 in to 2.9 in current quarter due to 103bps uptick in cumulative yields and meager 15bps uptick in cost of funds to 4.3. Management expects to maintain NIM given transition to MCLR regime and healthy CASA. Currently CASA stands at 43. Extraordinary improvement in operational efficiency Cost to income ratio came at 37 as oppose to past year s average of 46. Employee expense plunged 63 QoQ and other operating expenses dropped 12 QoQ due to cost cutting measure undertaken by the company. During FY18, bank closed 35 branches, in current quarter, it closed 9 branches and 228ATMs. Marginally improvement in asset quality; Recoveries strong GNPA came at 18.26 (v/s 18.38 in ). NNPA came at 10.58 (v/s 11.24 in ). PCR was 61.8 (v/s 58.4). Bank recovered 8445cr in the quarter as oppose to 5617cr in full FY18. Additionally, bank has deployed 3000 people to expedite recovery process. Bank recovered 322cr from two NCLT accounts in the quarter. Green shoots visible in capital adequacy CRAR stood at 9.62 (v/s 9.2 in Q4). Tier I stood at 7.33 (v/s 7.12 in Q4). Risk weighted density improved from 65 by June 17 to 55 by June 18. While gross advances increased by 31500cr YoY, RWA reduced by 40350cr. Government infused 2816cr on 23rd July 18. Sale of non-core assets to enhance capital supply Bank expects 8600-8700cr by sale of non-core assets by following: a) stake sell in PNB housing finance; b) 4 stake sell in PNB MetLife in IPO listing (bank holds 30 stake); and c) few real estate assets. Valuations Bank reported loss of 940cr. We expect laser-focused approach on core operations while selling of non-core assets to augur well for the bank. Also, we expect NIM to be sticky while cost to income ratio to undergo expansion. Stock is trading at FY20E P/BV of 0.6x, we assign BUY rating and value stock at P/BV of 0.7x implying an upside potential of 14 and a target price of INR 95. Downside Scenario Industry Current Price 80 Price Target 91 14 Stock Details BFSI Sensex 37887 Nifty 11450 Bloomberg Code PNB:IN Eq. Cap. (Rs. Cr) 552 Face Value (Rs.) 2 52-w L/H 71/231 Market Cap (Cr) 22,085 150 130 110 90 70 50 30 Data PNB Vs SENSEX Sensex Shareholding Pattern Upside Scenario FY18A FY19E FY20E NIM 2.1 2.5 2.5 Book value 149 129 127 PNB Jun 18 Mar 18 Jun 17 Promoters 62.3 62.3 65.0 FIIs 8.5 9.1 10.4 MF 6.7 8.2 5.8 Retail 6.2 4.8 4.5 Others 16.4 15.6 14.3 100.0 100.0 100.0 (INR Crores) FY16 FY17 FY18 FY19E FY20E Net interest income 15,311.8 14,993.2 14,922.4 18,837.4 19,967.7 Growth -8-2 0 26 6 Pre-provisioning profit 12,216.3 14,565.2 10,294.2 14,723.4 17,119.0 Growth 2 19-29 43 16 Adjusted PAT -3,974.4 1,324.8-12,282.8-5,349.7-797.6 BVPS (INR) 195.1 196.7 148.8 129.4 126.5 P/B (x) 0.4 0.8 0.5 0.6 0.6 Source: NSPL Research * Read last page for disclaimer & rating rationale
Punjab National Bank - Result Update Page 2 Result Analysis (INR Crores) Y-o-Y Q-o-Q Interest on Advances/Bills 9208 8145 7411 13 24 Interest on Investment 3405 3404 3470 0-2 Interest on bal. with RBI & Others 447 551 457-19 -2 Other Interest 53 37 47 44 11 INTEREST EARNED 13113 12136 11385 8 15 Net-Interest Income (NII) 4692 3855 3063 22 53 Other Income 1959 2332 1561-16 26 Total Income 6651 6187 4624 8 44 Operating Expenses 2456 2970 5072-17 -52 Pre-Provisional Profits 4195 3217-447 30-1038 Provisions & Contingencies 5758 2609 20353 121-72 PBT -1563 609-20800 -357-92 Provision for Taxes -623 265-7384 -335-92 Adjusted Net Profit -940 343-13417 -374-93 Bank s total operating income grew 8 YoY from 6187cr in & 44 QoQ from 4624cr in to 6651cr in this quarter on the back of 22 YoYgrowth in net interest income founded on 4 YoYgrowth in advances. Bank s Net Interest Income grew 22 YoY from 3855cr in & 53 QoQ from 3063cr in to 4692cr in this quarter. Yield on advances expanded from 7.9 in to 8.0 in, yield on investments marginally contracted from 7.5 in to 7.4 in and cost of funds contracted from 4.4 in to 4.3 in, resulting in 34bps NIM improvement to 2.9. Bank s quarterly cost to income ratio contracted by 11 YoY to 36.9 due to 26 reduction in employee cost. Bank s quarterly pre-provisioning profit grew 30 YoY from 3217cr in to 4195cr as oppose to loss of 447cr in previous quarter. Bank s reported loss of 940cr in this quarter as oppose to gain of 343cr in and loss of 13417 in. Gross NPA ratio came at 18.3 (v/s 13.6 in ) and NNPA came at 10.6 (v/s 8.7 in ). Provision coverage ratio stood at 61.8 (v/s 58.2 in ). (INR Crores) Y-o-Y Q-o-Q Comment Deposits 630,311 625,616 642,226 1-2 CASA deposits grew 1.7 YoY to 255879cr, term deposits grew 0.1 YoY to 374432. CASA came at 43. Borrowings 43,318 40,439 60,851 7-29 - Investments 193,891 202,548 200,306-4 -3 Advances 415,339 399,750 433,735 4-4 Domestic book constitutes 93 of total advance book. It grew 11 YoY led by 10 YoY growth in retail loans, 7 growth in large industrial loans. Retail book was driven by 14/12 growth in housing/education loan. Total Assets 737,894 725,207 765,830 2-4
Punjab National Bank - Result Update Page 3 Conference Call Highlights 1. Loans between 50lac to 50crare disbursed after monitoring through committee. 2. Bank has employed additional 3000 people to hasten recovery. 3. Bank focusing on domestic business and shrinking overseas business. Also bank is looking to monetize non-core assets and close unviable branches. 4. 90 of disbursements in last one year are rated A and above. 5. Generally, June quarter is weak in the banking industry. Gross domestic credit grew 10.7 YoYwhile it slipped 1.9 QoQ. 6. Bank expects to maintain CASA around 43 going forward. 7. Bank s strategy is multi-pronged, tranche into a) enhanced recovery; b) cashing non-core assets; c) cost control and d) conservation of capital. 8. Enhanced recovery: Total recovery made in FY18 was 5617cr while recoveries made in stood at 8445cr. 9. Cashing non-core assets: bank has monetized 167cr till date. Going forward, bank is expecting 8600-8700cr by sale of noncore assets. This bank expects to achieve by a) stake sell in PNB housing finance; b) 4 stake sell in PNB MetLife in IPO listing (bank holds 30 stake in same); and c) few real estate assets. 10. Cost control: Bank closed 8 branches and 228 ATMs. Also, bank closed representative offices in Sydney, Shanghai, Dubai and Dhaka. During FY18, bank notably closed 35 branches. 11. Conservation of Capital: Risk weighted asset density improved from 64 in June 17 to 55 by June 18. In absolute terms, RWA reduced by 40350cr when gross advances had increased by 31500cr. 12. Bank also has received 2816cr of capital infusion from the government. 13. Guidance: A) Bank guided on maintaining domestic credit growth of 10 + YoY in FY19. B) NIM came at 2.90. Bank expects to maintain margins due to i)mclr regime ii) lower cost of funds because of increasing CASA. C) RWA is expected to witness reduction of 26000cr in FY19 as oppose to 40,000cr in FY18. 14. Duration of HTM portfolio is between 3 to 4 years. 15. Bank has provided provisions of 63 on secured and non-secured account concerned with fraud (which surfaced in Jan 18). 16. Total restructured portfolio stood ~ 0cr. Total watchful accounts including restructured accounts stood between 8,000-10,000cr. 17. Resolution of two accounts in NCLT yielded 322crduring the quarter.
592 605 619 636 632 627 662 691 695 699 721 734 714 4.1 4.0 5.9 8.6 9.2 9.1 9.1 7.8 8.7 8.4 7.6 11.2 10.6 6.5 6.4 Thousands crores 8.5 12.9 12.5 12.1 13.8 13.6 13.7 13.7 13.3 18.4 18.3 7.6 7.5 7.9 7.9 7.9 7.8 7.6 7.4 7.4 7.4 7.3 7.3 7.4 551 565 582 601 603 602 634 659 664 669 690 705 688 6.5 7.8 Thousands crores 8.5 8.5 8.3 7.9 7.9 7.7 8.0 9.4 9.5 9.5 9.1 381 381 393 412 392 394 386 419 410 452 434 415 518 540 549 553 554 575 612 622 626 636 648 642 630 Thousands crores Thousand crores Punjab National Bank - Result Update Page 4 Advances Profile Deposits Profile 460 440 420 380 360 0 0 3 5-5 1-2 9-5 3 10-4 -4 12 10 8 6 4 2 0-2 -4 700 600 500 300 200 100 42 40 40 41 42 39 47 46 44 44 44 43 41 50 45 40 35 30 25 20 15 10 5 340-6 - 0 Advances Growth QoQ Deposits CASA Yield Profile Interest Bearing Liabilities 10.0 800 7.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 700 600 500 300 200 100 5.9 5.7 4.94.9 4.7 4.64.6 4.54.44.44.34.2 4.3 6.0 5.0 4.0 3.0 2.0 1.0 0.0-0.0 Yield on advances Yield on investments Average Interest bearing Liabilities Cost of funds Interest Earning Assets Asset Quality 800 700 600 500 300 200 100 2.8 2.9 3.1 3.0 2.8 2.9 2.6 2.5 2.6 2.6 2.6 1.9 2.9 3.5 3.0 2.5 2.0 1.5 1.0 0.5 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0-0.0 0.0 Interest Earning Assets NIM GNPA NNPA
Punjab National Bank - Result Update Page 5 Profit & Loss (INR Crores) FY16 FY17 FY18 FY19E FY20E Interest earned 47,424.3 47,276.0 47,995.8 55,045.9 58,348.6 Interest expended 32,112.6 32,282.8 33,073.4 36,208.5 38,381.0 Net interest income 15,311.8 14,993.2 14,922.4 18,837.4 19,967.7 Non-interest income 6,877.0 8,951.4 8,880.9 7,932.3 8,564.0 Total income 22,188.8 23,944.5 23,803.3 26,769.7 28,531.6 Operating expenses 9,972.5 9,379.4 13,509.1 12,046.4 11,412.7 Pre-provisioning profit 12,216.3 14,565.2 10,294.2 14,723.4 17,119.0 Provisions 17,954.2 12,553.6 29,869.3 22,707.9 18,309.4 Profit before tax (PBT) -5,737.9 2,011.5-19,575.1-7,984.6-1,190.4 Tax expense -1,763.5 686.7-7,292.3-2,634.9-392.8 Adjusted PAT -3,974.4 1,324.8-12,282.8-5,349.7-797.6 Balance Sheet (INR Crores) FY16 FY17 FY18 FY19E FY20E Capital 392.7 425.6 552.1 552.1 552.1 Shareholder's Fund 38,310.1 41,847.0 41,074.3 35,724.6 34,927.1 Deposits 553,051.1 621,704.0 642,226.2 680,759.8 721,605.3 Borrowings 59,755.2 40,763.3 60,850.8 64,501.8 68,371.9 Cash & Balances with RBI 75,623.1 88,331.6 95,462.0 101,189.7 107,261.1 Investments 157,845.9 186,725.4 200,306.0 212,324.3 225,063.8 Advances 412,325.8 419,493.1 433,734.7 459,758.8 487,344.3 Total Assets 667,390.5 720,330.5 765,830.1 811,779.9 860,486.7 RATIOS FY16 FY17 FY18 FY19E FY20E Growth rates Advances () 8.4 1.7 3.4 6.0 6.0 Deposits () 10.3 12.4 3.3 6.0 6.0 Total assets () 10.6 7.9 6.3 6.0 6.0 NII () -7.5-2.1-0.5 26.2 6.0 Pre-provisioning profit () 2.2 19.2-29.3 43.0 16.3 Balance sheet ratios Credit/Deposit () 74.6 67.5 67.5 67.5 67.5 CASA () 61.8 58.2 56.6 56.6 56.6 Advances/Total assets () 16.4x 17.3x 17.9x 20.5x 23.7x Operating efficiency Cost/income () 44.9 39.2 56.8 45.0 40.0 Opex/total assets () 1.5 1.3 1.8 1.5 1.3 Opex/total interest earning assets () 1.5 1.4 1.9 1.6 1.4 Profitability NIM () 2.5 2.2 2.1 2.5 2.5 RoA () NA 0.2 NA NA NA RoE () NA 3.3 NA NA NA Asset quality Gross NPA () 13.3 13.1 18.4 21.1 23.5 Net NPA () 8.9 8.1 11.2 12.4 14.4 PCR () 33.4 38.3 38.9 47.0 45.0 Slippage () 8.5 0.2 7.4 5.5 5.0 Per share data / Valuation BV (Rs.) 195.1 196.7 148.8 129.4 126.5 P/BV (x) 0.4x 0.8x 0.5x 0.6x 0.6x
Punjab National Bank - Result Update Page 7 Punjab National Bank Date CMP (INR) Target Price (INR) Recommendation August 08, 2018 80 91 Buy Rating Legend Strong Buy More than 15 Buy 5-15 Disclaimer: This report has been prepared by Nalanda Securities Pvt. Ltd( NSPL ) and published in accordance with the provisions of Regulation 18 of the Securities and Exchange Board of India (Research Analysts) Regulations, 2014, for use by the recipient as information only and is not for circulation or public distribution. NSPL includes subsidiaries, group and associate companies, promoters, directors, employees and affiliates. This report is not to be altered, transmitted, reproduced, copied, redistributed, uploaded, published or made available to others, in any form, in whole or in part, for any purpose without prior written permission from NSPL. The projections and the forecasts described in this report are based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections are forecasts were based will not materialize or will vary significantly from actual results and such variations will likely increase over the period of time. All the projections and forecasts described in this report have been prepared solely by authors of this report independently. None of the forecasts were prepared with a view towards compliance with published guidelines or generally accepted accounting principles. This report should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this report nor anything contained therein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. It does not constitute a personal recommendation or take into account the particular investment objective, financial situation or needs of individual clients. The research analysts of NSPL have adhered to the code of conduct under Regulation 24 (2) of the Securities and Exchange Board of India (Research Analysts) Regulations, 2014. The recipients of this report must make their own investment decisions, based on their own investment objectives, financial situation or needs and other factors. The recipients should consider and independently evaluate whether it is suitable for its/ his/ her/their particular circumstances and if necessary, seek professional / financial advice as there is substantial risk of loss. NSPL does not take any responsibility thereof. Any such recipient shall be responsible for conducting his/her/its/their own investigation and analysis of the information contained or referred to in this report and of evaluating the merits and risks involved in securities forming the subject matter of this report. The price and value of the investment referred to in this report and income from them may go up as well as down, and investors may realize profit/loss on their investments. Past performance is not a guide for future performance. Actual results may differ materially from those set forth in the projection. Except for the historical information contained herein, statements in this report, which contain words such as will, would, etc., and similar expressions or variations of such words may constitute forward looking statements. These forward looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward looking statements. Forward looking statements are not predictions and may be subject to change without notice. NSPL undertakes no obligation to update forward looking statements to reflect events or circumstances after the date thereof. NSPL accepts no liabilities for any loss or damage of any kind arising out of use of this report. This report has been prepared by NSPL based upon the information available in the public domain and other public sources believed to be reliable. Though utmost care has been taken to ensure its accuracy and completeness, no representation or warranty, express or implied is made by NSPL that such information is accurate or complete and/or is independently verified. The contents of this report represent the assumptions and projections of NSPL and NSPL does not guarantee the accuracy or reliability of any projection, assurances or advice made herein. Nothing in this report constitutes investment, legal, accounting and/or tax advice or a representation that any investment or strategy is suitable or appropriate to recipients specific circumstances. This report is based / focused on fundamentals of the Company and forward looking statements as such, may not match with a report on a company s technical analysis report. This report may not be followed by any specific event update/ follow up. Following table contains the disclosure of interest in order to adhere to utmost transparency in the matter; Disclosure of Interest Statement Details of Nalanda Securities Pvt. Limited (NSPL) Details of Disciplinary History of NSPL Research analyst or NSPL or its relatives'/associates' financial interest in the subject company and nature of such financial interest Whether Research analyst or NSPL or its relatives'/associates' is holding the securities of the subject company Research analyst or NSPL or its relatives'/associates' actual/beneficial ownership of 1 or more in securities of the subject company, at the end of the month immediately preceding the date of publication of the document Research analyst or NSPL or its relatives'/associates' any other material conflict of interest at the time of publication of the document from the subject company in the past 12 months Has research analyst or NSPL or its associates managed or co managed public offering of securities for the subject company in the past 12 month for investment banking or merchant banking or brokerage services from the subject company in the past 12 months for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months or other benefits from the subject company or third party in connection with the document. Has research analyst served as an officer, director or employee of the subject company Has research analyst or NSPL engaged in market making activity for the subject company Other disclosures NSPL is a Stock Broker registered with BSE, NSE and MCX SX in all the major segments viz. Cash, F & O and CDS segments. Further, NSPL is a Registered Portfolio Manager and is registered with SEBI SEBI Registration Number: INH000004617 No disciplinary action is / was running / initiated against NSPL No (except to the extent of shares held by Research analyst or NSPL or its relatives'/associates') Hold 0 5 Reduce -5-0 Sell Less than -5